The three best passive investments include an emerging market technology fund, a health care exchange-traded fund (ETF) and a diverse portfolio of commodities.
Passive investing is a long-term investment strategy involving holding indices rather than individual securities. Indices are portfolios that contain dozens of stocks, bonds or other securities designed to track the performance of a particular industry, sector or asset class.
Purchasing a share of an index fund allows an investor to quickly diversify his or her portfolio across multiple investments. Analysts and experts have long expounded on the importance of diversification. Instead of holding just stocks or bonds, savvy investors spread their portfolios across multiple asset classes, such as commodities or real estate.
By diversifying investments across different assets and sectors, an investor’s portfolio is less likely to be affected by the performance of any one asset or sector. Diversification increases the chances that at least one of the investments will perform well, offsetting or mitigating underperforming assets. Additionally, spreading investments helps smooth out returns over time, benefiting long-term investors.
However, with thousands of index funds available to investors, we have identified our top three ones to aid your research.
3 Best Passive Investments to Buy Now: #3
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ: PDBC)
Invesco Optimum Yield Diversified Commodity Strategy K-1 ETF (NASDAQ: PDBC) is the largest liquid commodities ETF in the world with $6.1 billion in net assets. The fund trades and manages a wide range of commodity derivatives, including gold, crude oil, aluminum and corn.
Inflation reached a four-decade high of 6.5% in 2022. As a result, the Federal Reserve (Fed) began an aggressive campaign to raise interest rates to combat rising consumer prices. The current Fed target range of 4.5%-4.75% is a 15-year high.
The combination of a slowing global economy, rising inflation and interest rate hikes caused the stock market to record one of its most volatile years ever in 2022. The S&P 500 and NASDAQ fell by 19.4% and 19.7%, respectively. However, experts expect the market downturn to continue well into 2023.
Although inflation rates are expected to fall in 2023, they are projected to remain well above the Fed’s target of 2%. In response, the Fed has signaled its intent to keep interest rates high. Wall Street currently believes there will be two more interest rate hikes in the coming months.
As a result, There is no better time to diversify into commodities, with investors facing a declining global economy, rising inflation and high volatility. Precious metals, farm products and crude oil have a low correlation with traditional assets such as stocks and bonds. Their prices do not move in the same direction as those assets, protecting a portfolio against market downturns and reducing volatility.
Commodities have historically been used as a hedge against inflation. Hard assets such as gold and silver hold their value much better than cash, stocks or bonds. As the prices of commodities tend to increase as the cost of living rises, they can help to protect the purchasing power of investors’ assets.
Commodities serve as more than a temporary hedge against market downturns and volatility. As the world’s population grows and economies expand, the demand for these finite resources increases, allowing investors to benefit from higher commodity prices due to scarcity.
PDBC’s performance has been neutral over the past year as commodity prices have fallen from their peaks in early 2022. The ETF currently trades at $15.02 per share. However, PDBC is set to rebound as economic uncertainty foreshadows the coming months. PDBC’s price movement over the trailing 12 months is charted below, alongside a 50-day moving average.
Chart provided by Stock Rover.
Our recommendation of PDBC is due to its ability to expose investors to a wide range of commodities. No asset is fully inflation or volatility-proof. However, a diverse basket of commodities is the best hedge against an impending 2023 recession.
PDBC also provides diversification benefits. Seasoned mutual fund and ETF investors know the importance of accounting for capital gains taxes on top of fund management fees. PDBC, as its name suggests, avoids the pesky Schedule K-1 IRS tax form. Funds that issue them record higher fees and taxes. K-1s also arrive later than other tax forms, increasing the risk of delayed or late tax filings for investors.
Investing in PDBC, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF, provides investors with exposure to a diversified portfolio of commodities, diversification benefits, potential returns during periods of inflation and tax benefits. It is an excellent choice for investors looking to add commodities to their portfolio or hedge against risk.
3 Best Passive Investments to Buy Now: #2
Vanguard Health Care Index Fund ETF (NYSEARCA: VHT)
The Vanguard Health Care Index Fund ETF (NYSEARCA: VHT) is a domestic ETF tracking the MSCI US Investable Market Health Care 25/50 Index. The fund manages over $20.2 billion in net assets and invests in health care companies such as UnitedHealth Group (NYSE: UNH) and Johnson & Johnson (NYSE: JNJ).
Health care provides investors access to a relatively recession-resistant sector with strong growth potential. The industry is also highly diverse, comprising various subsectors, such as pharmaceuticals, biotechnology, medical devices and health care services, reducing investor risk.
As people live longer and the population ages in Western countries, the demand for health care services is set to increase. Their share of elderly individuals is projected to rise dramatically by 2050. One-in-five people in Japan, Germany and Italy are already 65 or older. As citizens continue to get older, so will the demand for health care. The global health care industry is expected to reach $7.5 trillion over the next five years at a compound annual growth rate (CAGR) of 9.8%.
Advances in technology have also added a new element of growth in the health care industry. Telemedicine, artificial intelligence (AI) and even 5G provide new opportunities for companies. AI and 5G are already being used to improve patient diagnoses, analyze viruses and bacteria and develop new cures. AI alone is projected to add $41.4 billion to the global health care market by 2027.
Health care stocks also serve as a shield against inflation and recession. People still require health care services even during times of economic downturn. The inelasticity of demand provides stability for investors during market downturns. Industry costs have also historically risen faster than the inflation rate, which can provide a hedge against inflation.
VHT provides investors with exposure to the entire industry. The ETF makes diversification easy and inexpensive by investing across the different health care subsectors. Additionally, VHT’s 0.1% expense ratio is notably lower than the 0.24% industry average, while outperforming the market. Over the past five years, VHT has had an annual average return of 12.6%, compared to the S&P 500’s 9.1% over the same period.
VHT has seen a modest 2.1% growth in price over the past 12 months, but its value has jumped dramatically in recent months. The fund’s market price has climbed by 10.3% since mid-June 2022. VHT’s change in price is graphed below, along with a 50-day moving average.
Chart provided by Stock Rover.
Certain health care stocks and industries can be volatile. Smaller entities often live or die on Federal Drug and Administration approval for proposed drugs in their development pipeline. However, VHT is weighted by size, so large-cap stocks such as AbbVie (NYSE: ABBV) and Pfizer (NYSE: PFE) dominate. A volatile biotechnology startup has minimal influence over the fund’s performance.
The attractiveness of the health care industry can be justified by the entrance of new major players into the sector. Mark Cuban’s online pharmacy: Cost Plus Drugs has taken off, garnering over 1.5 million customers in a year since its launch. Amazon (NASDAQ: AMZN) announced plans in January 2023 to expand its Prime service to include RxPass. RxPass is a drug subscription platform intended to ship prescriptions to customers’ doors for a $5 per month fee. Investing in VHT provides investors access to a high-growth industry, perfect for hedging against inflation and recession risk at a low cost.
3 Best Passive Investments to Buy Now: #1
KraneShares CSI China Internet ETF (NYSEARCA: KWEB)
KraneShares CSI China Internet ETF (NYSEARCA: KWEB) tracks the CSI Overseas China Internet Index. The index is composed of Chinese companies in internet or internet-related industries. The ETF manages $6.5 billion in net assets.
KWEB had been performing exceptionally poorly in 2022, down 49.5% in late October, due to China’s zero-COVID policy stemming economic growth in the country and the government’s recent tech crackdown. However, the fund has since rebounded, skyrocketing by 90.9% in price in the last three months. KWEB’s movement over the past year is shown below, alongside a 50-day moving average.
Chart provided by Stock Rover.
China’s end of zero-COVID in December 2022 has caused stocks to jump as businesses anticipate a return to economic normalcy in the near future. There are also signs that the government’s tech crackdown is starting to wrap up. Ridesharing giant DiDi Global is set to resume normal operations after regulators placed an 18-month pause, preventing the company from growing.
The once looming risk of Chinese stocks being delisted from U.S. exchanges has eased significantly after regulators from the two countries reached an auditing agreement in late August. All signs indicate a golden period for Chinese tech stocks in the coming months.
The questions surrounding Chinese tech stocks have never concerned the industry’s viability. The country’s dual status as the second-largest economy in the world and an emerging market has fueled the rise of tech giants with massive growth trajectories, such as Alibaba (NYSE: BABA) and Baidu (NASDAQ: BIDU).
China’s 1.0 billion internet users spent an estimated $2.9 trillion on online retail shopping in 2022. For comparison, the 307.3 million internet users in America made $904.9 billion in online retail purchases last year. However, only 73.1% of China’s citizens are online, meaning the room for growth is enormous. Chinese retail e-commerce sales are forecasted to reach $4.0 trillion by 2026, a CAGR of 8.4%.
Chinese President Xi Jinping has also emphasized encouraging foreign investment moving forward. High-tech industries were highlighted as an area of importance for such developments. Foreign investors have long complained about the country’s restrictive access and lack of intellectual property protection. A more welcoming shift could reignite the spark that fueled the initial surge of growth in the country in the 1990s and 2000s.
The Chinese economy is also not highly correlated with other major global economies providing diversification benefits for investors. With the NASDAQ firmly in the red in 2022, KWEB is great for investors seeking the high returns U.S. tech stocks normally provide.
Capison Pang is an editorial intern who writes for www.stockinvestor.com and www.dividendinvestor.com.
